The Relationship between Corporate Governance and the Cost of Equity Capital: Evidence from Italian Stock Exchange
Journal of Management and Governance, September 2012, (DOI 10.1007/s10997-012-9230-9)
28 Pages Posted: 12 Dec 2012
Date Written: December 10, 2012
Abstract
Aim – The aim of this paper is to investigate the relationship between corporate governance (CG), in terms of its internal significance, and the cost of equity capital (CEC), based on a sample of companies listed on the Italian Stock exchange on 31/12/2009. We used Italy as a case study mainly because we expect that the key features of the Italian setting in terms of financial markets and corporate governance will impact on the relationship between CG and CEC.
Methodology – On the basis of a literature review, we identify the attributes of internal CG predicted as having a direct effect on CEC. The selected CG attributes (board independence, board size, existence of the audit and the nomination/remuneration committees and independence of board committees) have been used to construct a comprehensive corporate governance quality index for each firm. The CG score, as indicator of CG quality, is the independent variable of the multiple regression equation that brings together CG score and CEC (dependent variable), after controlling for the variables related to the risk.
Originality/Value – This paper belongs to the current of research regarding the relationship between CG and CEC, and it contributes to the literature dealing with CG and firm value determinants, by providing additional information concerning the impact of CG on another important determinant of firm value, i.e. CEC, in a context, that of Italy, which has not been extensively explored in previous research. The main contribution of the paper hinges on the setting chosen, in terms of how CG and key financial markets features impact on the relationship between CG and CEC offering new insights not previously addressed by literature.
Findings – The results provide evidence of a significant association between the CG score and the firm’s equity capitalcost, after controlling for differences in the Fama and French (1993) risk factors.
Post print (i.e. final draft post-refereeing) version of the article published in Journal of Management and Governance, Online first, DOI 10.1007/s10997-012-9230-9.
Beyond the journal formatting, please note that there could be minor changes from this document to the final published version.
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Keywords: corporate governance, cost of equity capital, Italy, listed companies
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